Mechel in Media

Pavel Shtark: We are shifting the focus of coal production to the Far East

12.01.2015

Mining Journal

Low coal prices are cutting into the profits of Russian mining companies. The indirect effects of western sanctions are also looming. Nonetheless, leading Russian coal firms are cautiously pressing on with development plans, which include exploring new areas for coal and improving mining infrastructure.

Recent headline figures for Russia’s coal industry make for tough reading. Coal prices have fallen 40% since 2011. The industry suffered a consolidated loss of Rb22 billion (US$623 million) in 2013.

Investment in the sector also decreased 1.5 times over the same period, falling to Rb75 billion. Production decreased by 0.03% year-on-year between January and October 2014, coming in at 287.3Mt.

“As for our mood, we have a conservative attitude in terms of planning our business for 2015,” said Pavel Shtark, CEO of Mechel Mining Management Company.
“Today coking coal prices are at their seven-year lowest, and this fact of course proves a major pressure on our financial results. Today’s price level is unpleasant for us, but in no way critical.”

Sergey Stepanov, CEO of Raspadskaya, one of Russia’s leading coal producers, has a similarly tempered view of the coal industry’s near-term outlook: “Coal prices should not drop any further. But the current situation could last for another year or two,” said Stepanov. “Because of the low prices people don’t want to invest in the industry. Doing so over the next two to three years just doesn’t make sense.”

As a result of the less than favourable current market conditions, mining firms are trimming their costs in certain areas. Stepanov from Raspadskaya told Mining Journal his firm was exploring ways to lower costs in certain areas.

Other firms are hoping the existing leanness of their operations will be enough to see them through this tough time. “Our Russian coal facilities are among the best in the world in terms of cost curve position. Even in current conditions they all work at a profit, we are among 25% of the most efficient producers on the cost curve, so in 2014 we hope to maintain coal sales volumes at last year’s level,” said Mechel’s Shtark.

The indirect effect of western sanctions could also soon take its toll.

“The direct effect is small scale,” said Stepanov. “In the long term, there could be issues as major financing for the industry has come from the west in the last five to 10 years. So long-term funds could be compromised.

“If we’re looking at the next year things will be fine in the industry, but if we’re looking beyond one year the impact is definitely negative.”
    
Nonetheless, mining companies in Russia are continuing to expand and improve their operations. The Russian government is strongly backing the sector. It recently set a target for coal to meet between 31% and 38% of domestic electricity needs by 2020. To this end, in April the Kremlin introduced a new 20-year coal sector spending strategy valued at Rb250 billion roubles. Most of this will be channelled into improving the logistics networks for transporting coal.

There are some exciting, ambitious new ventures coming to the fore that will boost production to supply markets both in Russia and abroad. In September state-controlled defence and technology company Rostec, which is also currently the target of Western sanctions, inked a deal with the world’s biggest coal producer, Chinese Shenhua Group, to explore and develop coal in Siberia and Far Eastern Russia, a massive project that is estimated to cost between US$8 billion and US$10 billion.

The deal focuses on the Ogodzhinskoye coal deposit, located in the Amur Region and estimated to have 1,600Mt of reserves.

Coal production should start in 2019 and annual output is expected to climb to 30Mt, according to Rostec. 

Rostec and Shenhua are also constructing a marine coal terminal at Port Vera in Primorsky territory. It is expected to have an annual capacity of 20Mt.

The terminal will start being built next year and should be operational in either 2018 or 2019. The two companies are also building a string of coal-fired power plants that will be used to generate electricity to supply both Russia and China, and possibly other Asian countries.

Meanwhile, Mechel is focusing on developing its Elga coal complex, having secured US$2.5 billion in financing from the state-owned Bank for Development and Foreign Economic Affairs. Elga, located in southeastern Yakutia, is one of the biggest deposits of high-quality coking coal in the world.

“Elga will remain our chief development project in the near future, its vast 2.2 billion-tonne reserves will be enough for us to mine for another 100 years,” said Shtark.

“In 2015-2016 we plan to mine 3- 3.5 million tonnes annually at Elga. In the medium term, we plan to reach 12 million tonnes of run-of-mine coal a year, and in the long term production may go up to 30 million tonnes a year,” he adds.

Meanwhile, Raspadskaya is investing in its infrastructure. In September the company launched a 2.7Mt coking coal longwall. In November it announced the commissioning of another 2.8 million tonne coking coal longwall.

“The mine will not receive a lot of investment over the next five years but we are focusing on investing in maintenance,” said Raspadskaya’s Stepanov.

Asian opportunity

Furthermore, Asia is emerging as an increasingly important market of the future for the Russian coal industry. Although Western sanctions have not targeted coal companies, the indirect effects of sanctions and generally tense relations between Russia and Western countries arguably only increases the allure of greater business with the East. 

Mechel’s CEO Shtark is enthusiastic about the Asian market, highlighting that his company’s Elga project will make it well positioned to tap opportunities eastwards.

“The federal strategy for development of Russia’s coal industry until 2030 envisions shifting the focus of coal production to the Far East, into underdeveloped regions, closer to our Asian consumers,” he said.

“Our project of development for the Elga deposit, whose reserves total 2.2 billion tonnes, is a good example of this strategy’s implementation. Elga has a unique geographical advantage in dealing with Asia Pacific due to a comparatively short transport leg to ports.

“In many ways it is thanks to the Elga project that Russia will become a key metallurgical coal supplier for Asia Pacific, to rival Australia.”

Raspadskaya’s Stepanov is similarly upbeat and argues that the Asian market is more attractive now than it was previously.

“For the last two years it has been unprofitable to sell to the Eastern markets, because of the strength of the Russian currency and logistics costs,” he said. “Prices for coal in Asia, although stable, have been low and selling to other markets has been more profitable.”

According to Stepanov, a more favourable currency environment and improving transport costs has put certain Asian markets on his radar. “We’re now thinking about Japan and Korea because these are very attractive clients that want the best coal,” he said.

Mechel is eyeing the Indian market as well. The leading fuel trader Glencore predicts that India could even overtake China as the biggest coal importer rising to 180Mt in 2015 and then almost doubling to 300Mt by 2020.

“Russia could also profit from high demand in India. We cannot supply India due to its remoteness and high transportation costs, but India could take on most of Australian coking coal, which would free the markets of Japan, Korea, China and Europe for Russia,” said Shtark.

China is one of the biggest markets in Asia of interest to mining firms. China consumes 67% of coal produced globally. The country’s coal imports have also risen sharply – by 40% between 2012 and 2013. The current figure is expected to double again over the next decade.

However, Stepanov’s enthusiasm for the Chinese market is reserved. “China as a market is both good and bad: Good because they can buy in big volumes. Bad because China always gives the lowest price. Becoming very reliant on China for business can be a pernicious strategy because the prices are so low.”
 
Finally, progress is being made on the transport and logistics infrastructure front, which will ultimately enable Russian coal mining firms to get their product to market quicker and at a lower cost.

Russian Railways is in the midst of a massive project to revamp and increase the transport capacity of the country’s eastern railway network, pumping around Rb500 billion into the network between now and 2018.

Mechel has successfully concluded the construction of a 321km railroad which links its Elga deposit with the Baikal-Amur Mainline, an undertaking that cost the company US$2 billion, but will get the coal mined at Elga to market. 
 
“We are also near completion of a large-scale restructuring of the seaport Posiet on the Japanese Sea’s coast, whose capacity will be increased from 4 to 7-8 million tonnes,” said Shtark.

“In the future we plan to increase it to 12 million tonnes, once the second stage of this technical upgrade is complete. Last year we also got long-term access to Port Vanino’s transhipment facilities, which increased our transhipment capacity by 7 million tonnes and has a potential for further increase. This way, we have all the components of a logistical chain for stable supplies to Asia Pacific well in hand.

Prospects for the Russian coal sector over the next couple of years are modest at best. Nonetheless, developments at Ogodzhinskoye and Elga are ones to watch. So are transport infrastructure improvements in the east and Russia’s growing keenness to tap Asian markets.  

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